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A measure of the sensitivity of prices of fixed-rate instruments (e.g., bonds) to interest rate changes.

It is the second derivative of a bond’s price with respect to interest rates—duration is the first derivative. The longer the maturity of an instrument the greater the convexity; and for instruments with the same duration, the more dispersed the cash flows, the greater the convexity. The higher the convexity, the greater the price gain or price loss for a given change in interest rates.

Used together with duration, convexity provides a more accurate approximation of the gains and losses on a fixed-rate instrument portfolio from a given change in interest rates than using duration alone.

Source Publication:
IMF, 2004, Compilation Guide on Financial Soundness Indicators, IMF, Washington DC, Appendix VII, Glossary.

Statistical Theme: Financial statistics

Created on Thursday, August 26, 2004

Last updated on Wednesday, November 30, 2005